U.S.
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
DC
 20549
  
 FORM
10-Q
  
  
 /X/
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE QUARTERLY PERIOD ENDED September 30,
  2008
  /
      /
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 Commission
file number: 001-32134
  Z TRIM HOLDINGS, INC.
 (Exact
Name of Small Business Issuer as Specified in Its Charter)
  ILLINOIS
              36-4197173(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              (I.R.S. Employer
                Identification
      No.)
  1011 CAMPUS
DRIVE,MUNDELEIN,ILLINOIS60060
 (Address
of Principal Executive Offices)
 
 (847)
549-6002
 (Issuer's
Telephone Number, Including Area Code)
 
 Check
whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes /X/
No /  /
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes / / No /X/
 
 The
registrant has a single class of common stock, par value $.00005 per share, of
which there were 77,936,375 shares issued and outstanding as of November 10,
2008.
 
 Transitional
Small Business Disclosure Format (Alternative 2): Yes / / No /X/
   1
  
 PART I –
FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 See
Consolidated Financial Statements beginning on page F-1.
 
 
 ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
 
 The
following discussion is intended to assist in understanding the financial
condition and results of operations of Z Trim Holdings, Inc. You should read the
following discussion along with our financial statements and related notes
included in this Form 10-Q. The following discussion contains forward-looking
statements that are subject to risks, uncertainties and assumptions. Our actual
results, performance and achievements in 2008 and beyond may differ materially
from those expressed in, or implied by, these forward looking
statements.
 
 
 Overview.
 
 Z Trim
Holdings, Inc. is an emerging growth company focused on the production,
marketing and distribution of custom functional food ingredient solutions for
both domestic and international markets. The Company’s namesake product is a
USDA-developed, all-natural, zero calorie functional food ingredient made from
healthy dietary fiber. The Company has an extensive intellectual property
portfolio, highlighted by an exclusive license from the USDA to make, use and
sell Z Trim both domestically and internationally.   Z Trim can be
produced from virtually any agricultural product, including corn and/or
oat.  Current Z Trim products include gels and powders used to replace
portions of fat, gums, starches and carbohydrates in foods.  In
addition to replacing fat and adding fiber, Z Trim’s products provide a number
of other value-added functionalities. Specifically, Z Trim’s products can
improve capacity and yield to a finished product line.  Z Trim’s
Products offer significant process improvements by reducing loss, reducing
breakage, and contributing toward waste reduction and
utilization.  Our products also offer moisture control, flavor
encapsulation, heat, pH and freeze/thaw stability, while enhancing mouthfeel and
texture.
 
 The
Company currently manufactures and markets Z Trim products as competitive
ingredients that improve the food industry's ability to deliver on its promises
of healthier foods, while also saving them money. The Company's primary goal is
establishing Z Trim as an important ingredient in revolutionizing the food
industry.  The Company is developing its market through (i) direct
sales to major food manufacturers, as well as small and mid size companies, and
(ii) direct sales to large food institutions such as those that supply to
restaurants, hospitals, schools and cafeterias. Our research and development
team, including strategic industry partners, continues to develop additional
products.
  Z Trim
Holdings, Inc. was incorporated in the State of Illinois on May 5, 1994 under
the original name Circle Group Entertainment Ltd.
 
 Z Trim’s
products compete against fats, fat replacers, modified starches, gums, oils and
similar ingredients.  None of these other products functions
identically to our products.  Our business is part of the global
$25-30 billion per year (2006) business of food additives.  The global
hydrocolloid business is a comparably minor $3.80 billion per
year.  Specifically, the U.S. fat replacer and bulk dietary fiber
(supplement) markets are estimated to be $ 500 million each.  The
global business of hydrocolloids at large is intensely oligopolistic with few
major players and the food sector market, although growing at 6.5%, is still
very competitive.
    2
  
 The
Company protects an array of intangible assets that includes patents pending and
issued, as well as a wide array of trade secrets and know-how, trademarks and
copyrights.  Central to this portfolio is an exclusive license to US Patent
No. 5,766,662, including all related international patents, issued to Dr. George
Inglett of the USDA.  This license expires upon the expiration of the
underlying patent in late 2015.  Through the process of development and
commercialization of the technology, the Company has identified and sought
patent protection for improvements to the manufacturing process, product
applications and is currently developing several commercially promising spin-off
technologies.  The Company also maintains a stable of trademarks that
continues to gain value through usage and increased brand
recognition.
  Presently,
the Company employs 24 full-time employees and no part-time
employees.
 
 
 RECENT
MATERIAL DEVELOPMENTS
 
 SALES AND
MARKETING
 
 The
results of the last 9 months suggest the beginning of a very positive
trend.  Since new management took over in August of 2007, we have
significantly changed our marketing strategy.  In the nine months of
2007, the vast majority of our sales came directly through internet sales to
individual end-users.  Most of these sales were in very small
quantities to customers who were not necessarily repeat customers.  In
the first nine months of 2008, the vast majority of our sales have been to food
manufacturers, who are purchasing in much greater quantities with repeat and
expanding orders.
 
 In fact,
this trend in sales growth for the first three quarters of 2008 is very
promising, and summarized in the following graph.
   
     3
  
  On
October 23, 2008 the Company and Admiration Foods announced that Admiration
Foods has established a new line of mayonnaise and salad dressings called Garden
Fresh(TM) made with Z Trim® multifunctional fiber blends.
  Full
capacity production of the line is now underway, consisting of mayonnaise, honey
mustard, ranch and creamy Italian dressings. The Z Trim co-branded products are
the latest in Admiration Foods' long standing tradition of providing both its
foodservice and retail customers with gourmet taste without gourmet price, and
now enable the company to deliver on that promise with fewer calories from
fat.
   While
Admiration intends to eventually make the Garden Fresh products available to
consumers via retail, the mayonnaise and dressing line will find ready
acceptance among school foodservice operations in many parts of the
country.
  On
October 17, 2008 the Company announced that all Walden Farm products are now
being made with Z Trim multifunctional fiber blends in place of portions of gums
or modified starches. The products were exhibited at Z Trim's booth #1749 at the
American Dietetic Association's Food and Nutrition Conference and Exposition at
McCormick Place West, October 26-28, 2008.
  Walden
Farms makes and sells a variety of products free of calories, gluten,
carbohydrate, sugar, fat and cholesterol, for both retail and foodservice,
including mayo salad and sandwich spread, creamy peanut spread, chocolate syrup,
pancake syrup, fruit syrup, fruit spreads, jams and jellies, dressings, veggie
dips, fruit dips, barbecue sauce, ketchup, seafood sauce, Alfredo, marinara and
other pasta sauces. The products are sold around the world and in the U.S. in
such grocery chains as Albertson's, Jewel, Shoprite, Super Target, Kroger,
Meier's and Ralph's, to name but a few.
  On
September 23, 2008, encouraged by sales growth of its multifunctional fiber
ingredients in consecutive quarters, Z Trim announced that it will increase
production, and will convert approximately 10,000 square feet of space adjacent
to its plant in Mundelein, Illinois for inventory storage.
   The sales
increase reflects demand from diverse manufacturers seeking the broad range of
product attributes that characterize the Z Trim product line, especially as a
nutritional and quality value-added alternative to higher priced
ingredients.
   The
increased demand is also due to the revitalized approach to the food industry
begun late last year with a change in leadership.
  On
September 12, 2008, the Company announced that it will partner with students
from the Hospitality and Tourism Academy of Baltimore’s National Academy
Foundation (NAF) High School to demonstrate its multifunctional fiber food
ingredient at the Mid-Atlantic Food, Beverage, and Lodging Expo, the largest
trade show on the East Coast, attracting thousands of attendees and hundreds of
exhibitors from New York to Florida.
  As the
prospect of menu labeling legislation continues to loom in local pockets
throughout the nation, Z Trim’s brand equity is resonating louder with young
people beginning careers in the food industry, as well as established restaurant
chefs, owners and vendors.
   4
   A host of
food manufacturing companies have begun rolling out finished products containing
Z Trim to both retail and foodservice. For example, the Salad Bar line of
dressings manufactured by Ken’s Foods was on display at the Z Trim booth. Ken’s
created the line using Z Trim multifunctional fiber in place of certain oils and
gums, thereby maintaining a clean label without sacrificing taste and texture.
The line was originally created for use in specific school districts. For many
people, the significantly reduced fat dressings with Z Trim are
indistinguishable from their full fat counterparts.
  Although
Z Trim has been showcasing Z Trim-enhanced products from a variety of large and
small food manufacturers at food shows of late, Z Trim has opted to work with
the Restaurant Association of Maryland’s Hospitality Education Foundation (MHEF)
for this show.
   ProStart
is a national program whose curriculum is written by the National Restaurant
Association. The MHEF ProStart program has recruited students from Baltimore’s
National Academy Foundation (NAF) High School to prepare a cheese sauce Queso
dip with substantially reduced fat.  As well, the students made mini
pumpkin muffins that Z Trim sampled at booth #165.
  On July
22, the Company announced that it was exhibiting and providing samples of
healthier burgers, dressings and snack bars to an estimated 7000 food service
directors and school nutrition professionals at the School Nutrition
Association's 2008 Annual Nutrition Conference (ANC) July 20-23 in Philadelphia,
Pennsylvania.
  The
exhibited products, made by a host of small to large food manufacturing firms
who sell their items to school food service, represent an increasingly broad
array of marketplace goods that are made healthier with Z Trim's unique natural
corn bran fiber.
  Multi-functional
Z Trim improves nutritional profiles while at the same time contributing other
benefits, such as helping one of the top privately held meat processors in the
United States to sustain juiciness in the leanest of meats throughout
cooking.
  A varied
list of food producers selling to both retail and to schools is realizing the
benefits and attributes of Z Trim. Z Trim's successes within the school
districts of Florida gained the attention of one of the top dressing
manufacturers for retail and food service. That same company, which has since
become a customer of Z Trim, now makes and sells a line of reduced fat dressings
containing Z Trim to a group of 39 of the 67 school districts in Florida. That
group of 39 districts, which now includes Dade County, is the largest buying
entity for school food service in the nation, serving approximately 115 million
meals per year to Florida school children, according to Frank Mullins, MS, RD,
advisor to the school group.
  Bakery
items are another category well served by Z Trim, which not only replaces fat
with fiber in such applications, but can also assure that the other ingredients
used, such as in a filling, remain stable when blended.
   5
   Rounding
out the array of food categories made healthier by Z Trim, the thousand island,
ranch and French entries into the Heinz "Heart Healthy" line of portion packed
salad dressings will be sampled at the Heinz booth.
  RESEARCH AND
DEVELOPMENT
  On
October 8, 2008, the Company announced that its Research and Development team
had developed a cost effective fiber technology designed to provide an
alternative to both native and modified starches as consumers and food
manufacturers increasingly seek label friendly ingredients. Product development
experts at Z Trim note that Z Trim multifunctional fiber, which has already
begun to establish its superiority in the marketplace over other hydrocolloid
products in terms of taste neutrality and overall functionality, also provides
exceptional textural attributes for which formulators in the food industry
typically turn to starches.
  Unlike
starches, Z Trim requires no pre-cooking or other processes to prepare it for
inclusion in formulations. It can completely replace starches in many recipes,
and in other applications can complement starch in a blend that delivers a
superior combination of attributes. Z Trim blends readily without lumping, a
usual dispersion problem, and Z Trim lends exceptional water absorbing and
bulking characteristics.
  ORGANIZATIONAL
CHANGES
  On
September 18, 2008, the Company announced that its Board of Directors had taken
action to reduce the size of the Board from 7 to 5 members, effective for the
next shareholder meeting for the purpose of electing directors.
   In
addition to decreasing the number of directors, the Board of Directors amended
the Company's By-Laws to streamline the director nomination process by creating
a Nominating Committee. The two-member Nominating Committee is charged with the
duty to identify and evaluate potential director nominees, and to propose a
slate of director nominees to the Board for inclusion on the Company's
proxy.
  On
September 16, 2008 the Company announced that its transition from its common
stock being listed on the American Stock Exchange to trades in its common stock
being reported on the OTC Bulletin Board had been successfully completed. The
Company is trading under the symbol ZTMH.OB.
 
  CAPITALIZATION
  On
September 3, 2008, the Company announced that on September 2, 2008, the Company
entered into private placement subscription agreements pursuant to which we sold
23.7 units consisting of convertible notes and warrants, for an aggregate
offering price of $2,370,000.  Each of the units (individually, a
“Unit” and collectively, the “Units”) consists of a $100,000 24-month senior
secured promissory note (each a “Note” and collectively the “Notes”) convertible
at the rate of $0.26 per share into 384,615 shares of our common stock, $.00005
par value (the “Common Stock”), bearing interest at the rate of 8% per annum,
which interest is payable quarterly in Common Stock at the rate of $0.26 per
share.  Investors of each Unit also received two five-year warrants,
one to purchase 230,769 shares of Common Stock with an exercise price of $0.01
per share (the “$0.01 Warrants”), and the other to purchase 153,846 shares of
Common Stock with an exercise price of $0.26 per share (the “$0.26 Warrants”
and, together with the $0.01 Warrants, collectively the
“Warrants”).  We also entered into registration rights agreements in
connection with the private placement pursuant to which we have agreed to file
with the Securities and Exchange Commission a registration statement covering
the resale of the Common Stock underlying the Notes and the
Warrants.
   6
  
 We paid a
placement agent a 13% cash commission in connection with the private
placement.  The placement agent also received expense reimbursement,
and a five-year warrant to purchase 96,154 shares of Common Stock for each Unit
sold, with an exercise price of $0.26 per share.  In addition, the
placement agent’s warrants carry registration rights that are the same as those
afforded to investors in the private placement.
 
 We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
“Act”) pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
 
 The
description of the terms of sale of the securities described in this report is
qualified in its entirety by reference to the full text of the underlying
documents which have been attached as exhibits to Form 8-K filed with the SEC on
September 3, 2008.
 
  LITIGATION
SETTLEMENT
  On
September 2, 2008, the Company announced an update with respect to its ongoing
litigation with George Foreman Enterprises.  The parties have settled
all outstanding litigation on amicable terms.  Pursuant to the Agreement,
both Parties are obligated to dismiss with prejudice all existing claims between
them, in both the Federal and State courts after Z-Trim satisfies all of its
obligations in the Agreement.  Z Trim is obligated to pay to George
Foreman Enterprises a total sum of $300,000 with $150,000 payable on September
3, 2008, and three additional payments of $50,000 each on January 1, 2009,
February 1, 2009 and March 1, 2009, respectively.  Z Trim has further
agreed to issue to George Foreman Enterprises a total of three million shares of
the Company's common stock and to register such shares on a best efforts
basis.  All other obligations between the parties have been mutually
resolved and neither party has admitted wrong-doing or liability of
any kind.
    7
 
 
 SUMMARY
OF FINANCIAL RESULTS
 
 RESULTS
OF OPERATIONS
 
 THREE AND
NINE MONTHS ENDING September 30, 2008 COMPARED TO THE THREE AND NINE MONTHS
ENDING September 30, 2007
 
 Revenues
 
 Revenues,
excluding those from the discontinued on-line bedding segment (E-tailer),
increased 132% for the three months ending September 30, 2008, from $113,975 for
the three months ending September 30, 2007 to $264,485 for the three months
ending September 30, 2008.  Revenues for the nine months ending
September 30, 2008 were $502,792 – an approximate 7.62% decrease from revenues
for the nine months ending September 30, 2007, which were $544,312, excluding
those from the discontinued on-line bedding segment (E-tailer)in 2007. The
decrease in product revenue was primarily due to the decrease in Z Trim products
sales via the internet.  The following table provides a breakdown of
the revenues for the periods indicated:
   Three months ending
      September 30,2008
              
              
              2007Products
              
              $
              264,485
              
              
              
              113,975Services
              
              
              --
              
              
              
              --Total
      Revenues
              
              $
              264,485
              
              
              $
              113,975Nine months ending
      September 30,2008
              
              
              2007Products
              
              $
              502,792
              
              
              $
              544,264Services
              
              
              --
              
              
              
              49Total
      Revenues
              
              $
              502,792
              
              
              $
              544,313
 Operating
expenses
 
 Operating
expenses consist of payroll and related costs, stock option expense, insurance,  occupancy  expenses,   professional  fees,  and  general
operating expenses.   Total
operating expenses decreased by $2,719,520 or 76.44% to $838,318
for the three months ending September 30, 2008 from $3,557,838 for the three
months ending September 30, 2007. The decrease in operating expenses was due to
a decrease in professional fees to outside lawyers and accountants, and a
decrease in stock based compensation expense.  Total operating
expenses decreased by $3,470,322 or approximately 48.96% to $3,616,388 for the
nine months ended September 30, 2008 from $7,086,710 for the nine months ended
September 30, 2007.
   8
  
 The stock
based compensation expense for the three months ended September 30, 2008 was
$12,292 compared to $1,881,481 for the three months ended September 30, 2007 – a
decrease of 91.94%.  The stock based compensation expense for the nine
months ending September 30, 2008 was $262,003.  The stock based
compensation expense for the nine months ending September 30, 2007 was
$3,251,738 – a decrease of 91.94%.
 
 Other
income (expense)
 
 Total
other expense for the three months ended September 30, 2008 was $684,943
compared to other income of $95,031 for the comparable period in 2007 -- a
decrease of 820.76%. Total other expense for the nine months ending on September
30, 2008 was $641,824 compared to other income of $364,016 for the nine months
ending on September 30, 2007.  In the third quarter of 2007, the
Company recovered a loan loss of $100,000.  In the third quarter of
2008, the Company had an interest expense of $77,961.
 
 Net
loss
 
 The
Company incurred a net loss for the third quarter of 2008 of $1,784,131 or $.02
per share, a $2,299,148 decrease from the net loss of $4,083,279 or $.06 per
share for the third quarter of 2007.
 
 The
Company incurred a net loss of $5,328,692 for the nine months ending on
September 30, 2008 or $(.07) per share, from the net loss of $8,293,603 for the
nine months ending September 30, 2007 or $(.12) per share.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 THREE AND
NINE MONTHS ENDING SEPTEMBER 30, 2008 COMPARED TO THE THREE AND NINE MONTHS
ENDING SEPTEMBER 30, 2007
 
 At
September 30, 2008, we had cash and cash equivalents, of $1,102,485 compared to
$4,158,798 at September 30, 2007. The Company raised approximately $8,898,376 in
additional equity capital through equity transactions during the first nine
months of 2007.
 
 Net cash
used by operating activities decreased by 9.4% to $4,362,135 for the nine months
ending September 30, 2008 as compared to $4,814,540 for the nine months ending
September 30, 2007.  Cash provided by discontinued operations was $484
for the nine months ending September 30, 2008 and ($27,492) for the nine months
ending September 30, 2007.
 
 Net cash
used by investing activities was $45,719 for the nine months ending September
30, 2008, as compared to $670,429 for the nine months ending September 30, 2007.
The change was due to additions of property and equipment for our manufacturing
plant in 2007.
 
 Net cash
provided by financing activities was $3,073,274 for the nine months ending
September 30, 2008, as compared to $8,996,216 for the nine months ending
September 30, 2007.  Net cash provided by financing activities for
both the nine months ending September 30, 2008 and 2007 was primarily from the
proceeds received from the sale of stock, options and warrants
exercised.
   9
  
 As of
September 30, 2008, our cash balance was approximately $1,102,485.  To
successfully grow our business, we must improve our cash position through
greater and sustainable sales of our product lines, increase the productivity of
the production process, as well as raise additional capital through a
combination of public or private equity offerings, strategic alliances or debt
financing to allow us to make necessary changes to our plant and to provide
working capital until we achieve profitability.  The Company estimates
that it will take from 15 to 24 months to achieve
profitability.  Given this estimate, the Company will likely need to
find sources of funding for both the short and long terms.  The
Company does not expect or anticipate that its concerns over its ability to
continue as a going concern will have any impact on its ability to raise capital
from internal and external sources.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We have
no off-balance sheet arrangements.
  CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
 
 Certain
information set forth in this report contains "forward-looking statements"
within the meaning of federal securities laws. Forward looking statements
include statements concerning our plans, objectives, goals, strategies, future
events, future revenues or performance, capital expenditures, and financing
needs and other information that is not historical information. When used in
this report, the words "estimates," "expects," "anticipates," "forecasts,"
"plans," "intends," "believes" and variations of such words or similar
expressions are intended to identify forward-looking statements. Additional
forward-looking statements may be made by us from time to time. All such
subsequent forward-looking statements, whether written or oral and whether made
by us or on our behalf, are also expressly qualified by these cautionary
statements.
 
 Our
forward-looking statements are based upon our current expectations and various
assumptions. Our expectations, beliefs and projections are expressed in good
faith and are believed by us to have a reasonable basis, including without
limitation, our examination of historical operating trends, data contained in
our records and other data available from third parties, but there can be no
assurance that our expectations, beliefs and projections will result or be
achieved or accomplished. Our forward-looking statements apply only as of the
date made. We undertake no obligation to publicly update or revise
forward-looking statements which may be made to reflect events or circumstances
after the date made or to reflect the occurrence of unanticipated
events.
 
 There are
a number of risks and uncertainties that could cause actual results to differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements contained in this report. Those risks and
uncertainties include, but are not limited to, our history of operating losses,
lack thus far of significant market acceptance of our products, the fact that we
may dilute existing shareholders through additional stock issuances, our
reliance on our intellectual property, and the potential negative effects of
manipulation in the trading of our common stock. Those risks and certain other
uncertainties are discussed in more detail in our 2007 Annual Report on Form
10-KSB/A and our subsequent filings with the SEC. There may also be other
factors, including those discussed elsewhere in this report that may cause our
actual results to differ from the forward-looking statements. Any
forward-looking statements made by us or on our behalf should be considered in
light of these factors.
    10
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF
MARKET RISKS
 
 There are
no material changes in the market risks faced by us from those reported in
our Annual Report on Form 10-K for the year ended December 31,
2007.
  ITEM
4. CONTROLS AND PROCEDURES
 
 The
Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in the Company’s
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Commission’s rules and forms, and that such
information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and
procedures, management recognized that any controls or procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
 
 Evaluation
of our Disclosure Controls and Procedures
 
 The
Company’s management has evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by this
report.  Based on such evaluation and because of the material weakness
described below, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were not
effective, at the reasonable assurance level, to enable us to record, process,
summarize and report information required to be included in our periodic SEC
filings within the required time period to ensure the information required to be
disclosed by the Company in the reports it files or submits under the Securities
Exchange Act is accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding the required
disclosure.
 
 Material
Weakness in Internal Control over Financial Reporting
 
 A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.  Management identified the following material weakness as
of September 30, 2008 relating to the Company’s internal control over financial
reporting:
   11
  
 n
              The
      Company did not maintain, and lacked resources to maintain, a sufficient
      complement of personnel with an appropriate level of accounting knowledge,
      experience and training in the application of generally accepted
      accounting principles commensurate with the Company’s financial reporting
      requirements.  Specifically, the Company had deficiencies in
      finance and accounting staff with sufficient depth and skill in the
      application of U.S. generally accepted accounting principles with respect
      to the valuation of certain accrued liabilities relating to warrants with
      contingent strike prices.
 
 This
control deficiency could result in a misstatement in the aforementioned
reporting that would result in a material misstatement to our annual or interim
financial statements that would not be prevented or detected.
 
 Remediation
Efforts
 
 Management
has begun implementing the following actions to remediate the material weakness
as described above:
  n
              Increase
      communication internally and with outside advisors.  We are in
      the process of implementing policies and processes to increase
      communication by and among senior management, external advisors and other
      third parties relevant to the above described computations, disclosures
      and appropriate level of oversight and
review.
  Changes in Internal Control Over
Financial Reporting.   During the third quarter of 2008,
we increased communication internally and with outside advisors.  We
have also made Sheldon Drobny, an experienced and highly credentialed certified
public accountant a special advisor to our audit committee.
  Inherent
Limitations of Internal Controls
  Our
Principal Executive Officer and Principle Financial Officer do not expect that
our disclosure controls or internal controls will prevent all error and all
fraud. Although our disclosure controls and procedures were designed to provide
reasonable assurance of achieving their objectives and our principal executive
and financial officer have determined that our disclosure controls and
procedures are effective at doing so, a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute assurance that
the objectives of the system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented if there exists in an individual a desire to do so. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
   12
  Furthermore,
smaller reporting companies face additional limitations. Smaller reporting
companies employ fewer individuals and find it difficult to properly segregate
duties. Often, one or two individuals control every aspect of the Company's
operation and are in a position to override any system of internal control.
Additionally, smaller reporting companies tend to utilize general accounting
software packages that lack a rigorous set of software controls.
  PART II –
OTHER INFORMATION
 
 ITEM
1.  LEGAL PROCEEDINGS.
 
 On
September 2, 2008, the Company announced an update with respect to its ongoing
litigation with George Foreman Enterprises.  The parties have settled
all outstanding litigation on amicable terms.  Pursuant to the Agreement,
both Parties are obligated to dismiss with prejudice all existing claims between
them, in both the Federal and State courts after Z Trim satisfies all of its
obligations in the Agreement.  Z Trim is obligated to pay to George
Foreman Enterprises a total sum of $300,000 with $150,000 payable on September
3, 2008, and three additional payments of $50,000 each on January 1, 2009,
February 1, 2009 and March 1, 2009, respectively.  Z Trim has further
agreed to issue to George Foreman Enterprises a total of three million shares of
the Company's common stock and to register such shares on a best efforts
basis.  All other obligations between the parties have been mutually
resolved and neither party has admitted wrong-doing or liability of
any kind.
  As
previously reported, the Company settled an outstanding case with Farhad Zaghi
and related parties (collectively, "Zaghi"), and the case has been dismissed
with prejudice.
  On July
7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
Cluck for violation of the Consumer Fraud Act, purportedly due to the Company’s
refusal to allow for the exercise of 300,000 stock
options.  Management believes that the allegations are frivolous and
wholly without merit and will vigorously defend the claim.
  On March
20, 2007, the Company filed a patent infringement suit in the United States
District Court for the Western District of Wisconsin seeking unspecified damages
and equitable relief against a manufacturer of a competing
product.  On January 28, 2008, the Court granted summary judgment in
favor of the Defendant, finding non-infringement.  The Company has
since voluntarily dismissed its appeal and entered into a settlement agreement
wherein both parties dismissed their claims with prejudice and Z Trim agreed to
pay $21,000 in full satisfaction of an award of costs against it.
  During
November 2007, the Company determined, through the course of its investigation
of all prior equity transactions, that 1,040,000 options that were issued in
2002 and 2003 to a former officer were both issued without proper authorization
and as non-qualified stock options, as opposed to qualified.  The
Company had previously treated these options as if properly issued and as
qualified “incentive stock options.”  The former officer exercised
these options in 2004 and 2005, resulting in the issuance of 1,040,000 shares of
common stock. On or about September 26, 2008, the Company entered into an
agreement with the former officer, Greg Halpern, for the return of the 1,040,000
shares of common stock in exchange for $37,000.
    13
  ITEM
1A.  RISK FACTORS
 
 There have been no material changes to
the risk factors disclosed in Item 1A Risk Factors in our Annual Report for the
year ended December 31, 2007.
 
 ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 NONE
 
 ITEM
3.  DEFAULTS UPON SENIOR SECURITIES
 
 NONE
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 NONE
 
 ITEM
5.  OTHER INFORMATION
 
 NONE
 
 ITEM
6.  EXHIBITS
 
 A list of
the exhibits required to be filed as part of this report are presented in the
Exhibit Index.
 
 
 
 SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized as of November 14, 2008.
  Z
      TRIM HOLDINGS, INC.By:
                /s/ Steven
      J. CohenSteven
      J. CohenDirector,
      andChief
      Executive Officer
 
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities as of
November 14, 2008.
  /s/Steven
      J. CohenSteven
      J. CohenDirector
      and Chief Executive Officer(principal
      executive officer)




/s/Brian
      ChaikenBrian
      ChaikenChief
      Financial Officer
                (principal
      financial or accounting officer)


14
  
 
 INDEX
OF EXHIBITS
 
 EXHIBIT
NO.                       DESCRIPTION
 
 3(i)
              Articles
      of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 2.1 to the
      Company's Form 10-SB filed on August 21, 2000, and as Exhibit 3.3 to the
      Company's Form 10-QSB filed on August 16, 2004, and incorporated herein by
      reference).
 
 3(ii)
              Bylaws
      of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the
      Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the
      Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the
      Company’s Form 8-K filed on November 16, 2007, and incorporated herein by
      reference).
 
 4.1
              Specimen
      Certificate for common stock (filed as Exhibit 3.1 to the Company's Form
      10-SB filed on August 21, 2000, and incorporated herein by
      reference).
 
 4.2
              Form
      of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K
      filed on March 30, 2006 and incorporated herein by
    reference).
 
 4.3
              Form
      of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's
      Form 8-K filed on March 30, 2006 and incorporated herein by
      reference).
 
 4.4
              Form
      of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's
      Form 8-K filed on March 30, 2006 and incorporated herein by
      reference).
 
 4.5
              Form
      of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form
      10-KSB filed on April 2, 2007 and incorporated herein by
      reference).
 
 4.6
              Form
      of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s
      Form 10-KSB filed on April 2, 2007 and incorporated herein by
      reference).
 
 4.7
              Form
      of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s
      Form 10-KSB filed on April 2, 2007 and incorporated herein by
      reference).
 
 10.1
              Steve
      Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form
      10-QSB for the quarter ending June 20, 2006 and incorporated herein by
      reference).
 
 10.2
              Brian
      Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit
      10.2 to the Company’s Form 10-KSB filed on April 15, 2008 and incorporated
      herein by reference).
 
 10.3
              Intentionally
      left blank.
 
 10.4
              Z
      Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the
      Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004
      and approved by its Shareholders on that date and incorporated herein by
      reference).
 
 10.5
              Industrial
      Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated
      May 20, 1999 (filed as Exhibit 6.7 the Company’s Registration Statement on
      Form 10-SB and incorporated herein by
  reference).
 
 10.6
              Industrial
      Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated
      June 18, 1999 (filed as Exhibit 6.8 to Z Trim's Registration Statement on
      Form 10-SB and incorporated herein by
  reference).
 
 10.7
              Assignment
      of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and
      Brookhaven Science Associates dated March 26 2003 (filed as Exhibit 10.14
      to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and
      incorporated herein by reference).
 
 10.8
              Assignment
      of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and
      University of Illinois dated July 9, 2003 (filed as Exhibit 10.15 to Z
      Trim's Form 10-QSB for  the quarter ending September 30, 2003
      and incorporated herein by
reference).
 
 10.9
              Assignment
      of License Agreement between Z Trim Holdings, Inc. and Brookhaven Science
      Associates dated July 22, 2003 (filed as Exhibit 10.16 to Z Trim's Form
      10-QSB for the quarter ending September 30, 2003 and incorporated herein
      by reference).
 
 
 31.1*
              Statement
      Under Oath of Principal Executive Officer of the Company pursuant to
      Section 302 of Sarbanes-Oxley Act of
2002.
 
 31.2*
              Statement
      Under Oath of Principal Financial Officer of the Company pursuant to
      Section 302 of Sarbanes-Oxley Act of
2002.
 
 32.1*
              Statement
      Under Oath of Principal Executive Officer of the Company pursuant to
      Section 906 of Sarbanes-Oxley Act of
2002.
 
 32.2*
              Statement
      Under Oath of Principal Financial Officer of the Company pursuant to
      Section 906 of Sarbanes-Oxley Act of
2002.
 
 ----------------------
 *Filed
herewith
 
 
 15
 
 
 
 INDEX TO
FINANCIAL STATEMENTS
  PAGEConsolidated
      Balance Sheets at September 30, 2008 (unaudited) andDecember
      31, 2007
                F-1Consolidated
      Statements of Operations for nine months and threemonths
      ended as of September 30, 2008 and 2007 (unaudited)
                F-3Consolidated
      Statements of Cash Flows for the nine months endedSeptember
      30, 2008 and 2007 (unaudited)
                F-4Notes
      to Consolidated Financial Statements as of September 30, 2008
      and2007
      (unaudited)
                F-5
 
  
   Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  ASSETSUnauditedCurrent
      Assets
                
                9/30/2008
                
                
                12/31/2007Cash
      and cash equivalents
                
                $
                1,102,485
                
                
                $
                2,436,581Accounts
      receivable (net of allowance of $10,067 in 2008and  $1,005
      in 2007)
                
                
                188,375
                
                
                
                7,522Inventory
                
                
                398,153
                
                
                
                592,666Prepaid
      expenses and other assets
                
                
                326,857
                
                
                
                152,597Net
      assets of discontinued operations
                
                
                -
                
                
                
                485Total
      current assets
                
                
                2,015,870
                
                
                
                3,189,851Property
      and equipment, net
                
                
                5,756,402
                
                
                
                6,221,653Other
      AssetsIntangible
      assets, net
                
                
                -
                
                
                
                140,001Prepaid
      Loan  - Long Term
                
                
                711,811
                
                
                
                -Deposits
                
                
                14,453
                
                
                
                14,453Total
      other assets
                
                
                726,264
                
                
                
                154,454TOTAL
      ASSETS
                
                $
                8,498,536
                
                
                $
                9,565,958
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-1
    Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  LIABILITIES
      AND STOCKHOLDERS' EQUITYUnauditedCurrent
      Liabilities
                
                9/30/2008
                
                
                12/31/2007Accounts
      payable
                
                $
                723,608
                
                
                $
                709,027Accrued
      expenses and other
                
                
                440,028
                
                
                
                2,189,308Total
      Current Liabilities
                
                
                1,163,636
                
                
                
                2,898,335Notes
      Payable - Long Term
                
                
                723,238
                
                
                
                -Total
      Liabilities
                
                
                1,886,874
                
                
                
                2,898,335Stockholders'
      EquityCommon
      stock, $0.00005 par value; authorized 200,000,000shares;
      issued and outstanding 78,976,375 and72,056,375
      shares, respectively
                
                
                3,972
                
                
                
                3,600Additional
      paid-in capital
                
                
                74,851,935
                
                
                
                69,603,639Accumulated
      deficit
                
                
                (68,244,245
                )
                
                
                (62,939,616
                )Total
      Stockholders' Equity
                
                
                6,611,662
                
                
                
                6,667,623TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                8,498,536
                
                
                $
                9,565,958
 
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-2
   Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
   Three
      months ended
              
              
              Nine
      months endedSeptember
      30
              
              
              September
      30FOR
      THE NINE MONTHS ENDED SEPTEMBER 30
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007REVENUES:Products
              
              $
              264,485
              
              
              $
              113,975
              
              
              $
              502,792
              
              
              $
              544,264Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              49Total
      revenues
              
              
              264,485
              
              
              
              113,975
              
              
              
              502,792
              
              
              
              544,313COST
      OF REVENUES:Products
              
              
              525,355
              
              
              
              734,225
              
              
              
              1,573,272
              
              
              
              2,127,507Total
      cost of revenues
              
              
              525,355
              
              
              
              734,225
              
              
              
              1,573,272
              
              
              
              2,127,507GROSS
      MARGIN
              
              
              (260,870
              )
              
              
              (620,250
              )
              
              
              (1,070,480
              )
              
              
              (1,583,194
              )OPERATING
      EXPENSES:Selling,
      general and administrative
              
              
              838,318
              
              
              
              3,532,066
              
              
              
              3,551,374
              
              
              
              7,050,349Impairment
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              136,668
              
              
              
              -Amortization
      of intangible assets
              
              
              -
              
              
              
              3,333
              
              
              
              3,333
              
              
              
              10,000Loss/(Gain)
      on asset disposals, net
              
              
              -
              
              
              
              22,439
              
              
              
              (74,987
              )
              
              
              26,361Total
      operating expenses
              
              
              838,318
              
              
              
              3,557,838
              
              
              
              3,616,388
              
              
              
              7,086,710OPERATING
      LOSS
              
              
              (1,099,188
              )
              
              
              (4,178,088
              )
              
              
              (4,686,868
              )
              
              
              (8,669,904
              )OTHER
      INCOME (EXPENSES):Rental
      and other income
              
              
              5,342
              
              
              
              10,500
              
              
              
              23,005
              
              
              
              31,500Interest
      income
              
              
              2,678
              
              
              
              58,525
              
              
              
              18,286
              
              
              
              138,055Interest
      expense
              
              
              (77,961
              )
              
              
              (1,386
              )
              
              
              (101,004
              )
              
              
              (3,431
              )Recovery
      of (provision for) loan
              
              
              -
              
              
              
              100,000
              
              
              
              -
              
              
              
              300,000Settlement
      (loss) gain
              
              
              (615,002
              )
              
              
              (72,608
              )
              
              
              (582,111
              )
              
              
              (102,108
              )Total
      other income (expenses)
              
              
              (684,943
              )
              
              
              95,031
              
              
              
              (641,824
              )
              
              
              364,016LOSS
      FROM CONTINUING OPERATIONS
              
              $
              (1,780,131
              )
              
              $
              (4,083,057
              )
              
              $
              (5,328,692
              )
              
              $
              (8,305,888
              )DISCONTINUED
      OPERATIONSIncome
      from discontinued operations(net
      of applicable tax of $0 in 2008 and 2007)
              
              $
              -
              
              
              $
              (222
              )
              
              
              -
              
              
              
              12,285NET
      LOSS
              
              $
              (1,780,131)
              
              
              $
              (4,083,279)
              
              
              $
              (5,328,692)
              
              
              $
              (8,293,603
              )Net
      Loss per Share from continuing operations-
      Basic and Diluted
              
              $
              (0.02
              )
              
              $
              (0.06
              )
              
              $
              (0.07
              )
              
              $
              (0.12
              )Net
      Loss per Share - Basic and Diluted
              
              $
              (0.02
              )
              
              $
              (0.06
              )
              
              $
              (0.07
              )
              
              $
              (0.12
              )Weighted
      Average Number of Shares Basic and Diluted
              
              
              77,976,375
              
              
              
              72,056,375
              
              
              
              76,279,153
              
              
              
              69,920,157
   The accompanying notes are an integral part of the consolidated
financial statements.
    F-3
    Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
  FOR
      THE NINE MONTHS ENDED SEPTEMBER 30
                
                2008
                
                
                2007Cash
      Flows From Operating Activities From Continuing
Operations:Net
      loss
                
                
                (5,328,692
                )
                
                
                (8,293,603
                )Less:
      Income from discontinued operations, net of tax
                
                
                -
                
                
                
                12,285Depreciation
      and amortization
                
                
                473,575
                
                
                
                504,708Loss
      on asset disposal
                
                
                40,727
                
                
                
                26,361Provision
      for bad debt
                
                
                9,062
                
                
                
                50,034Issuance
      of common stock and warrants for services
                
                
                230,000
                
                
                
                6,765Amortization
      of services
                
                
                -
                
                
                
                113,339Stock
      based compensation expense
                
                
                262,003
                
                
                
                3,251,738Recovery
      of loan loss
                
                
                -
                
                
                
                (300,000
                )Impairment
      of intangible assets
                
                
                136,668
                
                
                
                -Stock
      and warrant settlements
                
                
                322,903
                
                
                
                29,500Non-cash
      settlements of liabilities
                
                
                (111,792
                )
                
                
                -Amortization
      of noncash loan interest expense
                
                
                67,644
                
                
                
                -(Increase)
      in:Accounts
      receivable
                
                
                (189,915
                )
                
                
                (130,493
                )Inventory
                
                
                194,513
                
                
                
                (384,143
                )Prepaid
      expenses and other assets
                
                
                (171,434
                )
                
                
                (55,585
                )Deposits
                
                
                -
                
                
                
                (3,350
                )Increase/(Decrease)
      in:Accounts
      payable and accrued expenses
                
                
                (297,397
                )
                
                
                382,474Cash
      flows used in operating activities from continuing
    operations
                
                
                (4,362,135
                )
                
                
                (4,814,540
                )Cash
      Flows From Investing Activities From Continuing
Operations:Purchase
      of property and equipment
                
                
                (45,919
                )
                
                
                (713,604
                )Proceeds
      from asset disposals
                
                
                200
                
                
                
                43,175Cash
      flows used in investing activities from continuing
    operations
                
                
                (45,719
                )
                
                
                (670,429
                )Cash
      Flows From Financing Activities From Continuing
Operations:Net
      proceeds from convertible notes payable
                
                
                3,110,274
                
                
                
                -Common
      Stock Redemption
                
                
                (37,000
                )
                
                
                -Net
      proceeds from sales of stock
                
                
                -
                
                
                
                7,838,001Exercise
      of options and warrants
                
                
                -
                
                
                
                872,289Payments
      on capital lease obligations
                
                
                -
                
                
                
                (14,074
                )Proceeds
      from notes receivable for stock, net
                
                
                -
                
                
                
                300,000Cash
      flows provided by financing activities from continuing
      operations
                
                
                3,073,274
                
                
                
                8,996,216Net
      cash and cash equivalents used in (provided by) continuing
      operations
                
                
                (1,334,580
                )
                
                
                3,511,247Net
      (decrease)increase in cash and cash equivalents
                
                
                (1,334,580
                )
                
                
                3,511,247Operating
      cash from discontinued operations
                
                
                -
                
                
                
                (27,492
                )Cash
      of discontinued segment beginning of period
                
                
                484
                
                
                
                -Cash
      and cash equivalents, at beginning of period
                
                
                2,436,581
                
                
                
                675,043Cash
      and cash equivalents, at end of period
                
                
                1,102,485
                
                
                
                4,158,798Supplemental
      Disclosures of Cash Flow Information:Interest
      paid
                
                
                402
                
                
                
                3,430Interest
      to be paid in stock
                
                
                100,554
                
                
                
                -Supplemental
      Schedule of Noncash Investing and Financing Activities:Issuance
      of common stock and warrants for services
                
                
                230,000
                
                
                
                2,188,940Stock
      subscription payable
                
                
                -
                
                
                
                150,000Issuance
      of common stock in settlement of accrual
                
                
                1,353,700
                
                
                
                -
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4
 
  
 Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
   NOTE 1 – NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Nature of
Business
  Z Trim
Holdings, Inc. (the “Company”) manufactures a line of functional food
ingredients that can be used to replace fats and deliver fiber to a wide variety
of foods.  The Company’s products can be used by food manufacturers
and processors, restaurants, schools, and the general public worldwide. The
company continues to explore all available options for its other Z Trim
technologies and related assets.
  The
Company has participated in several public and private offerings and has
expanded its business.  In 2002, the Company acquired FiberGel
Technologies, Inc. (“FiberGel”), which owns an exclusive license to Z Trim, an
all-natural, agriculture-based fat replacement.
  A summary
of significant accounting policies follows.
  Presentation of Interim
Information
 
 The
financial information at September 30, 2008 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial information set
forth herein, in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) for interim financial information, and with the
instructions to Form 10-Q. Accordingly, such information does not include
all of the information and footnotes required by U.S. GAAP for annual financial
statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company’s annual Report on
Form 10-KSB for the year ended December 31, 2007.
  The
results for the nine months ended September 30, 2008 may not be indicative of
results for the year ending December 31, 2008 or any future
periods.
 
 Principle of Consolidation
and Presentation
  The
accompanying consolidated financial statements include the accounts of Z Trim
Holdings, Inc. and its subsidiaries after elimination of significantly all
intercompany accounts and transactions.
  Use of
Estimates
  The
preparation of the accompanying consolidated financial statements in conformity
with accounting principles generally accepted in the United States (U.S. GAAP)
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
  Revenue
Recognition
  The
Company generally recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is probable. In instances where the final acceptance of the
product is specified by the customer, revenue is deferred until all acceptance
criteria have been met. No provisions were established for estimated product
returns and allowances based on the Company’s historical
experience.
  Allowance for Doubtful
Accounts
  Management
of the Company makes judgments as to its ability to collect outstanding
receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding invoices. For those invoices not specifically
reviewed, provisions are provided at differing rates, based upon the age of the
receivable. In determining these percentages, management analyzes its historical
collection experience and current economic trends. If the historical data the
Company uses to calculate the allowance for doubtful accounts does not reflect
the future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected.  As of September 30, 2008, the allowance for
doubtful accounts was $10,067.  As of September 30, 2007 the allowance
for doubtful accounts was $0.
   F-5
  Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
 NOTE 1 – NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Cash and cash
equivalents
  For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash
equivalents.
  Fair value of financial
instruments
  All
financial instruments are carried at amounts that approximate estimated fair
value.
  Concentrations
  Cash and
cash equivalents are maintained with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and therefore bear minimal
risk.
  Inventory
  Inventory
is stated at the lower of cost or market, using the first-in, first-out
method.
  Property and
Equipment
  Property
and equipment are stated at cost.  Maintenance and repair costs are
expensed as incurred.  Depreciation is calculated on the accelerated
and straight-line methods over the estimated useful lives of the assets.
Estimated useful lives of five to ten years are used for machinery and
equipment, office equipment and furniture, and automobile. Estimated useful
lives of up to five years are used for computer equipment and related software.
Depreciation and amortization of leasehold improvements are computed using the
term of the lease.
  Intangible
Assets
  Intangible
assets were carried at the purchased cost less accumulated amortization.
Amortization was computed over the estimated useful lives of the respective
assets, generally from fifteen to twenty years.
  Impairment of Long-Lived
Assets
  Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstance indicate that
the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
an impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use is based on the fair value of the
asset. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.
  Income
Taxes
  The
Company and its subsidiaries are included in the consolidated federal income tax
return filed by the Parent.  The amount of current and deferred taxes
payable or refundable is recognized as of the date of the financial statements,
utilizing currently enacted tax laws and rates.  Deferred tax expenses
or benefits are recognized in the financial statements for the changes in
deferred tax liabilities or assets between years.
  Advertising
Costs
  The
Company expenses all advertising costs as incurred.  The amount for
nine months ended September 30, 2008 was $40,634.  The amount for the
nine months ended September 30, 2007 was $414,943.
  Income (Loss) Per Common
Share
   Basic net
income (loss) per share includes no dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common stock outstanding for the period. Diluted earnings per share is computed
by dividing net income by the weighted average number of shares outstanding and,
when diluted, potential shares from options and warrants to purchase common
stock using the treasury stock method. Diluted net loss per common share does
not differ from basic net loss per common share since potential shares of common
stock are anti-dilutive for all periods presented.
    F-6
   Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
  Cashless Exercise of
Warrants
  The
Company has issued warrants to purchase common stock where the holder is
entitled to exercise the warrant via a cashless exercise, when the exercise
price is less than the fair value of the common stock. The Company accounts for the
issuance of common stock on the cashless exercise of warrants on a net
basis.
  Stock Based
Compensation
  Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), “Share-Based Payment” (SFAS 123R), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006 based on the
grant date fair value calculated in accordance with the original provisions of
SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to December 31, 2005, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R).
  As a
result of adopting SFAS 123(R) on January 1, 2006, the Company recognized
pre-tax compensation expense related to stock options of $12,292 and $1,881,481
for quarters ended September 30, 2008 and 2007, respectively.
  New Accounting
Pronouncements
  In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Financial Accounting Standards (“FAS”) No. 159, The Fair Value Option for Financial
Assets andFinancialLiabilities - Including an amendment of FASB Statement No. 115, which
permits entities to choose to measure many financial instruments and certain
other items at fair value at specified election dates. A business entity is
required to report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. This
statement is expected to expand the use of fair value measurement. FAS No.159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
believes this has no impact on its current financial reporting.
  In
September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement addresses how to calculate fair value
measurements required or permitted under other accounting pronouncements.
Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of the statement will change current
practice. FAS No. 157 is partially effective for the Company beginning January
1, 2008.
  In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements.  SFAS N. 141
(R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired.  SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements.  The calculation of earnings per
share will continue to be based on income amounts attributable to the
parent.  SFAS No. 141 (R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15,
2008.  Early adoption is prohibited.  We have not yet
determined the effect on our consolidated financial statements, if any, upon
adoption of SFAS No. 141 (R) or SFAS No. 160.
  In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities.” SFAS No. 161 changes
the disclosure requirements for derivative instruments and hedging activities.
Entities will be required to provide enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and its related interpretations,
and how derivative instruments and related items affect an entity’s financial
position, operations and cash flows. SFAS No. 161 is effective as of
the beginning of an entity’s fiscal year that begins after November 15,
2008. Early adoption is permitted.  The company believes this has no impact
on its current financial reporting.
  
 F-7
 Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
  Reclassification.
  On August
6, 2008, in connection with the United States Securities and Exchange
Commission’s review of our financial statements, we determined that we needed to
amend our financial statements for the year end 2007 in order to clarify certain
information, be compliant with federal rule and regulations and correct an error
relating to an expense recognized in the first quarter of 2007 that should have
been incurred in the fourth quarter of 2004. Specifically, the Company’s
recognition of expense of $2,182,175 relating to the release of restrictions on
shares of stock on March 9, 2007 was incorrect.  The Company has
restated the transaction to fully recognize the expense when the shares of stock
were issued, in the fourth quarter of 2004.  As a result, the investor
relation expense of $2,182,175 that was recognized in the first quarter of 2007
has been removed against additional paid in capital.  Further, as a
result of the recognition of expense as of the fourth quarter 2004, the
valuation of the unrecognized stock at fourth quarter of 2004 was $1,170,000
less than the valuation in the first quarter of 2007. This results in an
increase in investor relations expense in 2004 of $1,012,175 and a reduction in
retained earnings in 2004 of $1,012,175, with a corresponding reduction in
retained earnings for all periods thereafter.  For the year ended
December 31, 2007, the net result was an increase to retained earnings of
$1,170,000.  Further, the net loss per share for the year ending
December 31, 2007 was reduced from $0.21 per share to $0.18 per
share.
  Additionally,
as a result of this reclassification, the following table shows all numbers that
have changed from what was previously reported for the nine months ended
September 30, 2007:
   Previously
      Reported
              Currently
      ReportedOperating
      Expenses (9 months)
              $
      9,268,885
              $7,086,710Net Loss (9
      months)
              $10,488,063 ($.015
      per share)
              $8,293,603 ($.012
      per share)
  
 NOTE 2 – GOING
CONCERN
  The
Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.  In
the near term, the Company expects operating costs to continue to exceed funds
generated from operations.  As a result, the Company expects to
continue to incur operating losses and may not have enough capital to grow its
business in the future.  The Company can give no assurance that it
will achieve profitability or be capable of sustaining profitable
operations.  As a result, operations in the near future are expected
to continue to use working capital.
 
 To
successfully grow the business, the Company must decrease its cash outflows,
improve its cash position and its revenue base, and succeed in its ability to
raise additional capital through a combination of primarily public or private
equity offerings or strategic alliances.
 
 The
Company is currently in the process of obtaining additional financing for its
current operations – See information on current financing in Note 7
hereinbelow.
 
 
  F-8
   
 Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
   NOTE 3 –
INVENTORY
  At
September 30, 2008 and December 31, 2007, inventory consists of the
following:
  9/30/2008
                
                
                12/31/2007Raw
      materials
                
                $
                47,224
                
                
                $
                30,402Packaging
                
                
                55,838
                
                
                
                67,421Work-in-process
                
                
                5,524
                
                
                
                4,850Finished
      goods
                
                
                289,568
                
                
                
                489,993Total
      inventory
                
                $
                398,153
                
                
                $
                592,666
   NOTE 4 – PROPERTY AND
EQUIPMENT, NET
  At
September 30, 2008 and December 31, 2007, property and equipment, net consists
of the following:
  9/30/2008
                
                
                12/31/2007Production,
      engineering and other equipment
                
                $
                5,301,635
                
                
                $
                5,213,084Leasehold
      improvements
                
                
                2,801,053
                
                
                $
                2,798,971Office
      equipment and furniture
                
                
                588,521
                
                
                $
                591,384Computer
      equipment and related software
                
                
                150,584
                
                
                $
                185,603Construction
      in process - Equipment
                
                
                9,930
                
                
                $
                64,860Construction
      in process - Leasehold Impr (Equipment)
                
                
                7,172
                
                
                $
                -8,858,894
                
                
                
                8,853,903Accumulated
      depreciation
                
                
                (3,102,492
                )
                
                
                (2,632,250
                )Property
      and equipment, net
                
                $
                5,756,402
                
                
                $
                6,221,653
  Depreciation expense was
$510,956 and $494,373 for the nine months ended September 30, 2008 and September
30, 2007, respectively. The depreciation expense was $170,154 and $167,295 for
the three months ended September 30, 2008 and September 30, 2007
respectively.
    F-9
   Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
  NOTE 5 – INTANGIBLE
ASSETS
  Amortization
of intangibles was $0 and $3,337 for the quarters ended September 30, 2008 and
2007, respectively.
  NOTE 6 – ACCRUED EXPENSES
AND OTHER
  At
September 30, 2008 and December 31, 2007 accrued expenses consist of the
following:
  9/30/2008
                
                
                12/31/2007Accrued
      legal
                
                $
                20,620
                
                
                $
                457,747Accrued
      payroll and taxes
                
                
                12,843
                
                
                
                65,510Accrued
      settlements
                
                
                326,426
                
                
                
                1,328,273Accrued
      expenses and other
                
                
                80,139
                
                
                
                337,778Total
      accrued  expenses and other
                
                $
                440,028
                
                
                $
                2,189,308
  NOTE 7 – STOCKHOLDERS'
EQUITY
  Private Placement
Offerings
  On June
18, 2008, the Company issued 8% Convertible Senior Secured Notes in the
aggregate principal amount of $1,400,000 (“Notes”).  Interest is
accrued quarterly in registered shares of common stock of the Company at $0.26
per share.  Upon the event of a default, the stated interest rate of
the Notes will be increased to 18% per annum. The Notes mature in two years from
date of issuance.  The Notes and accrued interest are payable in full
at maturity.  All amounts due under the Notes may be converted at any
time, in part or in whole, at the written election of the holder thereof, into
shares of the Company’s common stock at a conversion price of $.26 per
share.  The Notes are secured by a first priority perfected interest
in all the assets of the Company.
  Each
$100,000 principal amount of Notes is convertible, at the option of the holders,
into 384,615 shares of the Company’s common stock.  Holders of each
$100,000 principal amount of Notes received two five-year warrants, one to
purchase 230,769 shares of Common Stock with an exercise price of $0.01 per
share (the “$0.01 Warrants”), and the other to purchase 153,846 shares of Common
Stock with an exercise price of $0.26 per share (the “$0.26 Warrants” and,
together with the $0.01 Warrants, collectively the “Warrants”).  The
total warrants issued were 5,384,613 with a fair value of
$1,287,981.  Proceeds from the Notes have been allocated to
Convertible Notes Payable and Additional Paid-In Capital based upon the fair
value of these financial instruments in accordance with Accounting Principles
Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants.” The Notes have a beneficial conversion feature, which
have a value of $455,416, as defined by Emerging Issues Task Force Issue No.
98-5, “Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios.”  The warrants value and
the beneficial conversion value are discounted against the Notes and are being
amortized as interest expense using the effective interest method over the term
of the Notes.
  The terms
of the Notes require redemption in cash at 115% of face value upon certain
defaults that are indexed to risks other than interest or credit
risk.  The put feature should be separately accounted for as a
derivative under FASB Statement No. 133 (SFAS 133), “Accounting for Derivative
Instruments and Hedging Activities.” The Company’s assessment of the value of
the put feature is de minimus.
  In
connection with the issuance of the Notes and Warrants, the Company incurred
$1,340,085 of issuance costs, which primarily consisted of investment banker
fees in cash and warrants and legal and other professional fees.  The
costs have been allocated to the Warrants and Notes based upon the fair value of
these financial instruments.  The costs allocated to the Notes are
$435,159, of which $427,917 are noncurrent. These costs are being amortized as
interest expense using the effective interest method over the term of the
Notes.
    F-10
   The Notes
were sold to an “accredited investor” within the meaning of Rule 501 under the
Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the
private placement exemption afforded by Section 4(2) of the Securities Act and
of Regulation D promulgated under the Act.  In connection with the
issuance of the Notes, the Company entered into registration rights agreements
and has agreed to file with the Securities and Exchange Commission a
registration statement covering the resale of the Common Stock underlying the
Notes and the Warrants.
  On
September 2, 2008, the Company entered into private placement subscription
agreements pursuant to which we sold 23.7 units consisting of convertible notes
and warrants, for an aggregate offering price of $2,370,000.  Each of
the units (individually, a “Unit” and collectively, the “Units”) consists of a
$100,000 24-month senior secured promissory note (each a “Note” and collectively
the “Notes”) convertible at the rate of $0.26 per share into 384,615 shares of
our common stock, $.00005 par value (the “Common Stock”), bearing interest at
the rate of 8% per annum, which interest is accrued quarterly in Common Stock at
the rate of $0.26 per share.  Investors of each Unit also received two
five-year warrants, one to purchase 230,769 shares of Common Stock with an
exercise price of $0.01 per share (the “$0.01 Warrants”), and the other to
purchase 153,846 shares of Common Stock with an exercise price of $0.26 per
share (the “$0.26 Warrants” and, together with the $0.01 Warrants, collectively
the “Warrants”).  The Notes and accrued interest are payable in full
at maturity.  We also entered into registration rights agreements in
connection with the private placement pursuant to which we have agreed to file
with the Securities and Exchange Commission a registration statement covering
the resale of the Common Stock underlying the Notes and the
Warrants.  The total warrants issued were 11,394,236 with a fair value
of $1,592,973.  Proceeds from the Notes have been allocated to
Convertible Notes Payable and Additional Paid-In Capital based upon the fair
value of these financial instruments in accordance with Accounting Principles
Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants.” The Notes have a beneficial conversion feature, which
have a value of $396,519, as defined by Emerging Issues Task Force Issue No.
98-5, “Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios.”  The warrants value and
the beneficial conversion value are discounted against the Notes and are being
amortized as interest expense using the effective interest method over the term
of the Notes.
 
 We paid a
placement agent a 13% cash commission in connection with the private
placement.  The placement agent also received expense reimbursement,
and a five-year warrant to purchase 96,154 shares of Common Stock for each Unit
sold, with an exercise price of $0.26 per share.  In addition, the
placement agent’s warrants carry registration rights that are the same as those
afforded to investors in the private placement.
 
 We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
“Act”) pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.  In
connection with the issuance of the Notes, the Company entered into registration
rights agreements and has agreed to file with the Securities and Exchange
Commission a registration statement covering the resale of the Common Stock
underlying the Notes and the Warrants.
 
 The
description of the terms of sale of the securities described in this report is
qualified in its entirety by reference to the full text of the underlying
documents which have been attached as exhibits to Form 8-K filed with the SEC on
September 3, 2008.
  The
following is a summary of principal maturities of long-term debt during the next
two years:
   2009
              --2010
              $3,770,000
  
  F-11
 
 Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
 
  Exercising of Stock Warrants
and Options
  During
the first nine months of 2008 no stock warrants and options were
exercised.  The Company received total proceeds of $1,469,000 by
virtue of 1,569,551 options and warrant exercised, and an additional 11,578
non-cash warrants exercised, in the first nine months of 2007.
  Common Stock Issued on the
Cashless Exercise of Warrants
  No shares
of common stock were issued on the cashless exercise of warrants during the
first nine months of 2008 or 2007.
  NOTE 8 – NET LOSS PER
SHARE
  The
computation of basic and diluted net loss per share is as follows:
   Three
      Months Ended
                  September
      30,Numerator:
                
                2008
                
                
                2007Net
      loss from continuing operations
                
                $
                (1,784,131
                )
                
                $
                (4,083,057
                )Income
      from discontinued operations
                
                $
                -
                
                
                $
                (222
                )Net
      loss
                
                $
                (1,784,131
                )
                
                $
                (4,083,279
                )Denominator:Weighted
      average number of shares outstanding
                
                
                77,976,375
                
                
                
                72,056,375Net
      loss per share from continuing operations- basic and
    diluted
                
                $
                (0.02
                )
                
                $
                (0.06
                )Income
      per share from discontinued operations - basic and diluted
                
                $
                -
                
                
                $
                (0.00
                )Net
      loss per share-basic and diluted
                
                $
                (0.02
                )
                
                $
                (0.06
                )
  Nine
      months endedSeptember
      30,2008
                
                
                2007Numerator:Net
      loss from continuing operations
                
                $
                (5,328,692
                )
                
                $
                (8,305,888
                )Income
      from discontinued operations
                
                $
                -
                
                
                $
                12,285Net
      loss
                
                $
                (5,328,692
                )
                
                $
                (8,293,603
                )Denominator:Weighted
      average number of shares outstanding
                
                
                76,279,153
                
                
                
                69,920,157Net
      loss per share from continuing operations- basic and
    diluted
                
                $
                (0.07
                )
                
                $
                (0.12
                )Income
      per share from discontinued operations - basic and diluted
                
                $
                -
                
                
                $
                0.00Net
      loss per share-basic and diluted
                
                $
                (0.07
                )
                
                $
                (0.12
                )
  F-12
   Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
  As the
Company incurred net losses for the three months ended September 30, 2008 and
2007, the effect of dilutive securities totaling 7,292,560 and 697,241
equivalent shares, respectively, has been excluded from the calculation of
diluted loss per share because the effect was anti-dilutive.  The same
is true of the nine months ended September 30, 2008 and 2007, for dilutive
securities totaling 2,650,975 and 3,969,501, respectively.
  NOTE 9 – STOCK OPTION PLAN
AND WARRANTS
  The
Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended
in 2002 and 2004, which provides for the issuance of qualified options to all
employees and non-qualified options to directors, consultants and other service
providers.
  A summary
of the status of stock options as of September 30, 2008 and September 30, 2007
is as follows:
  Nine
      Months Ended
                
                
                Nine
      Months Ended9/30/2008
                
                
                9/30/2007Number
      of Shares
                
                
                Weighted
      Average Exercise Price
                
                
                Number
      of Shares
                
                
                Weighted
      Average Exercise PriceOutstanding
      at beginning of year
                
                
                16,595,523
                
                
                $
                1.04
                
                
                
                20,285,749
                
                
                $
                0.99Granted
                
                
                100,000
                
                
                $
                0.27
                
                
                
                2,072,000
                
                
                $
                1.26Exercised
                
                
                -
                
                
                $
                -
                
                
                
                (453,318
                )
                
                $
                0.77Expired
      and Cancelled
                
                
                (1,571,750
                )
                
                $
                1.04
                
                
                
                (6,042,908
                )
                
                $
                0.9615,123,773
                
                
                
                
                
                
                
                15,861,523Modification
                
                
                -
                
                
                $
                -
                
                
                
                12,996,773
                
                
                $
                1.07Modification
                
                
                -
                
                
                $
                -
                
                
                
                (12,996,773
                )
                
                $
                1.06Outstanding,
      end of period
                
                
                15,123,773
                
                
                $
                1.03
                
                
                
                15,861,523
                
                
                $
                1.04-
                
                
                
                
                
                
                
                -Exercisable
      at end of period
                
                
                14,998,773
                
                
                $
                1.04
                
                
                
                15,416,523
                
                
                $
                1.04
  At
September 30, 2008 the aggregate intrinsic value of all outstanding options was
$0 with a weighted average remaining contractual term of 1.5 years, of which
14,998,773 of the outstanding options are currently exercisable with an
aggregate intrinsic value of $0, a weighted average exercise price of $1.04 and
a weighted average remaining contractual term of 1.5 years.  The total
intrinsic value of options exercised during the quarter ended September 30, 2008
was $0.  The total fair value of options vested during the third
quarter of 2008 was $12,292.
  The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option valuation model.  This model uses the assumptions
listed in the table below.  Expected volatilities are based on the
historical volatility of the Company’s stock.  The risk-free rate for
periods within the expected life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
   F-13
   Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
   2008
                
                
                2007Weighted
      average fair value per option granted
                
                $
                0.27
                
                
                $
                0.78Risk-free
      interest rate
                
                
                2.28
                %
                
                
                4.65
                %Expected
      dividend yield
                
                
                0.00
                %
                
                
                0.00
                %Expected
      lives
                
                
                3.00
                
                
                
                3.00Expected
      volatility
                
                
                98.59
                %
                
                
                108.95
                %
  As of
September 30, 2008, the unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the plan was $8,422, which
had an average expense recognition period of 135 days.
  As of
September 30, 2008, the Company had reserved 20.0 million shares for issuance
under the Plan.  As of September 30, 2008, the Company had 4.88
million options available for grant under the Plan.
  Stock
options outstanding at September 30, 2008 are as follows:
  WeightedAverage
                
                
                WeightedRange
      of
                
                
                
                
                
                Remaining
                
                AverageExercise
                
                
                Options
                
                
                Contractual
                
                Exercise
                
                OptionsPrices
                
                
                Outstanding
                
                
                Life
                
                
                Price
                
                
                Exercisable$
                0.01-$1.50
                
                
                
                14,628,773
                
                
                
                1.5
                
                
                $
                0.99
                
                
                
                14,503,773$
                1.51-$3.00
                
                
                
                495,000
                
                
                
                1.7
                
                
                $
                2.35
                
                
                
                495,00015,123,773
                
                
                
                1.5
                
                
                $
                1.03
                
                
                
                14,998,773
  As of
September 30, 2008 and 2007, the Company has warrants outstanding to purchase
26,409,265 and 7,149,234 shares of the Company’s common stock, respectively, at
prices ranging from $0.01 to $1.20 per share.  These warrants expire
at various dates through September 2013.   There were 11,394,236
warrants issued in the third quarter of 2008 and 0 warrants issued in the third
quarter of 2007, respectively.
  NOTE 10 – SETTLEMENT
LOSS
  On
September 2, 2008, the Company announced an update with respect to its ongoing
litigation with George Foreman Enterprises.  The parties have settled
all outstanding litigation on amicable terms.  Pursuant to the Agreement,
both Parties are obligated to dismiss with prejudice all existing claims between
them, in both the Federal and State courts after Z-Trim satisfies all of its
obligations in the Agreement.  Z Trim is obligated to pay to George
Foreman Enterprises a total sum of $300,000 with $150,000 payable on September
3, 2008, and three additional payments of $50,000 each on January 1, 2009,
February 1, 2009 and March 1, 2009, respectively.  Z Trim has further
agreed to issue to George Foreman Enterprises a total of three million shares of
the Company's common stock and to register such shares on a best efforts
basis.  All other obligations between the parties have been mutually
resolved and neither party has admitted wrong-doing or liability of
any kind.  Due to this settlement, the Company recognized $750,000 of
settlement expense in this quarter.
  On March
20, 2007, the Company filed a patent infringement suit in the United States
District Court for the Western District of Wisconsin seeking unspecified damages
and equitable relief against a manufacturer of a competing
product.  On January 28, 2008, the Court granted summary judgment in
favor of the Defendant, finding non-infringement.  The Company has
since voluntarily dismissed its appeal and entered into a settlement agreement
wherein both parties dismissed their claims with prejudice and Z Trim agreed to
pay $21,000 in full satisfaction of an award of costs against it.
  
 F-14
  Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
 NOTE 11 – MAJOR CUSTOMERS
AND CREDIT CONCENTRATION
  The
Company’s customers are food manufacturers, school districts and the general
public that orders directly over the internet.  There were three
significant customers that accounted for greater than 10% (each) for the quarter
ended September 30, 2008. These three customers accounted for 32 %, 14% and 10 %
of total sales.  There were no significant customers for the quarter
ended September 30, 2007.  There were no outstanding amounts at
September 30, 2008.
  The
Company maintains cash deposits with major banks, which from time to time may
exceed federally insured limits.  At September 30, 2008 and December
31, 2007, $1,002,485 and $2,336,581 respectively, were in excess of federally
insured limits.  The Company periodically assesses the financial
condition of the institutions and believes that the risk of any loss is
minimal.
  NOTE 12 –
COMMITMENTS
  Building
Lease
  The
Company leases a combined production and office facility located in Mundelein,
Illinois.  The facility is approximately 44,000 square
feet.  The Company extended the lease until March 2010 and the
required monthly rental payments increased to $21,000, exclusive of property
taxes.   The Company also is responsible for payment of all
property taxes.  Insurance and maintenance are billed when
due.
  The
Company subleases approximately 9,800 square feet of the facility to two
tenants.  Both tenants terminated their respective leases in
2008.
  The
Company also leases a 5,000 square foot warehouse in Mundelein,
Illinois.  The lease commenced on August 1, 2007 and ends July 31,
2011.  The monthly net rent is $2,750.
  The
future minimum annual rental payments for the years ended December 31 under the
lease terms are as follows:
  Year Ended
                
                Rentals2009
                
                
                286,4332010
                
                
                98,4662011
                
                
                21,046$
                405,945
  NOTE 13 – PENDING
LITIGATION/ CONTINGENT LIABILITY
  As
previously reported, the Company settled an outstanding case with Farhad Zaghi
and related parties (collectively, "Zaghi"), and the case has been dismissed
with prejudice.
  On July
7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
Cluck for violation of the Consumer Fraud Act, purportedly due to the Company’s
refusal to allow for the exercise of 300,000 stock
options.  Management believes that the allegations are frivolous and
wholly without merit and will vigorously defend the claim.
  During
November 2007, the Company determined, through the course of its investigation
of all prior equity transactions, that 1,040,000 options that were issued in
2002 and 2003 to a former officer were both issued without proper authorization
and as non-qualified stock options, as opposed to qualified.  The
Company had previously treated these options as if properly issued and as
qualified “incentive stock options.”  The former officer exercised
these options in 2004 and 2005, resulting in the issuance of 1,040,000 shares of
common stock. On or about September 26, 2008, the Company entered into an
agreement with the former officer, Greg Halpern, for the return of the 1,040,000
shares of common stock in exchange for $37,000.
    F-15
   Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 AND 2007
  NOTE 14 – RELATED PARTY
TRANSACTIONS
  There
were no related party transactions for the first nine months of
2008.  There were no related party transactions for the first nine
months of 2007.
  NOTE 15 –
GUARANTEES
  The
Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company’s businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company’s use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.  The
terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its consolidated balance sheet as of September
30, 2008.
  In
general, the Company offers a one-year warranty for most of the products it
sold.  To date, the Company has not incurred any material costs
associated with these warranties.
     F-16